The US September CPI data is about to be released, and market attention is on the rise.

Recent U.S. inflation data has caused significant fluctuations in the stock market. The core Consumer Price Index (CPI) shows that a change of just 0.1% in the month-on-month data can have a notable impact on the market. The U.S. CPI data for September, which is set to be released this Thursday, is likely to trigger market turmoil once again.

The Importance of CPI

Currently, the Federal Reserve is doing everything possible to stabilize prices, even at the cost of the labor market to curb inflation, which highlights the importance of every inflation data.

CPI, as an indicator of actual inflation, is the primary reference for observing price rises. Although the Personal Consumption Expenditures index (PCE) is the Federal Reserve's preferred measure of inflation, the PCE is released only at the end of the month and is therefore less timely than the CPI, making the CPI the core indicator of market follow.

In the composition of CPI, core CPI is given more importance than overall inflation data. While global politicians are quite concerned about fluctuations in oil prices, the market and the Federal Reserve are more focused on potential inflation trends. Since the Federal Reserve began its interest rate hike cycle in March of this year, the month-on-month changes in CPI are more meaningful than the year-on-year changes.

The trend of the euro against the US dollar since 2021 also reflects the significant impact of inflation on the market.

September CPI Expectations

The market expects the core CPI in the US to rise by 0.5% month-on-month in September, down from 0.6% in August, but the year-on-year increase may reach 6.6%, far exceeding the Federal Reserve's target of 2% and higher than the year-on-year increase of 6.3% in August.

The Federal Reserve hopes to see potential inflation decrease to 2% or lower in a sustained and noticeable manner.

Three Possible Scenarios and Their Impact

1. Meets expectations:

If the core CPI rises by 0.5% or 0.4% month-on-month, it meets expectations. This may suggest that the price increase and interest rate hike cycle is nearing its end. However, even a month-on-month growth of 0.4% still implies a year-on-year increase of about 5%, indicating that inflation remains high.

The market may initially breathe a sigh of relief, and dollar bulls may choose to take profits. However, after the reaction, investors may reassess the implications of the data. Federal Reserve officials may reiterate that the current level of inflation remains high, necessitating further interest rate hikes.

Therefore, the release of the CPI may become a new opportunity to buy dollars, and the possibility of raising interest rates by 75 basis points again in November is still very high.

2. Below expectations:

If the core CPI month-on-month increase is 0.3% or lower, it may trigger a significant rise in the stock market and a sharp drop in the dollar, which is exactly what the Federal Reserve is hoping for.

Data below expectations will indicate that the 0.6% increase in August is a one-time phenomenon. The bond market may absorb the expectation of only a 50 basis point rate hike in November.

However, considering the impact of supply chain constraints and rising interest rates on mortgages, the likelihood of core CPI being below expectations is moderate.

3. Beyond expectation:

If the core CPI month-on-month increase reaches 0.6% or higher again, it will indicate that the low increase of 0.3% in July is an outlier. The market may readjust expectations for a 100 basis point rate hike in November.

If the core CPI rises by 0.7%, it may trigger massive dollar buying and a stock market crash.

Analysts believe that the likelihood of the core CPI exceeding expectations is low, but due to the high risks, this situation cannot be completely ruled out.

Conclusion

Given the market's muted reaction to last week's non-farm payroll data, and the significant volatility triggered by the previous two CPI data releases, the release of the September CPI data this Thursday will be highly anticipated, and its importance is self-evident.